Reported Decision : (2000) 50 NSWLR 66 New South Wales Court of Appeal CITATION : BBC Hardware Ltd v Payce Properties Ltd [2000] NSWCA 262 FILE NUMBER(S) : CA 40813/99 HEARING DATE(S) : 13 September 2000 JUDGMENT DATE : 9 October 2000 PARTIES : BBC Hardware Ltd - Appellant Payce Properties Pty Ltd - Respondent JUDGMENT OF : Stein JA at 1; Giles JA at 8; Fitzgerald JA at 35 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT ED 50033/99 FILE NUMBER(S) : LOWER COURT Einstein J JUDICIAL OFFICER : COUNSEL : F M Douglas QC & T G R Parker - Appellant M Tobias QC & D J Hammerschlag - Respondent SOLICITORS : Allen Allen and Hemsley - Appellant Morgan Lewis Alter - Respondent CATCHWORDS : LEASE - rent review clause - valuations of premises "for rental purposes as determined by the Valuer General at any time during" particular years - valuations made after the years and on highest and best use basis - whether valuations within the rent review clause. HELD: (1) The time was the time as at which the valuations were to be made, not when the valuer was to make them. (2) (By majority) The words "for rental purposes" meant that the valuer was to determine value for rental purposes under the use or uses permitted by the lease: valuations on a highest and best use basis were not as required by the rent review clause. D DECISION : Appeal allowed with costs. Orders below set aside and declarations requested in the Notice of Appeal made. Respondent to pay appellant's costs of the proceedings in the Equity Division. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40813/99 ED 50033/99 STEIN JA GILES JA FITZGERALD JA Monday 9 October 2000 BBC HARDWARE LIMITED v PAYCE PROPERTIES PTY LIMITED JUDGMENT 1 STEIN JA: This appeal involves an issue of construction of a rental review clause in a 40 year commercial lease of land at Homebush Bay. The relevant facts are set out in the judgment of Giles JA. 2 As to the issue of the time for the valuation to be made, I agree with Giles JA and have nothing to add. 3 The essential dispute concerns the phrase 'valuation for rental purposes' in the rental review clause of the lease. What was the intention of the parties when they entered into the legal relationship of landlord and tenant for the lengthy period of 40 years? Clearly it was for an independent review of the rental of the demised property every 3 years. But on what basis? What did the parties intend when they used the words 'for rental purposes' in cl 30 of the lease? 4 In my view, they did not mean that the property should be valued unencumbered by the lease and for its highest and best use. The use to which the land may be put by the lessee is restricted by cl 20. Any change in the lessee's use requires the lessor's agreement and may only be for another business purpose. It is, in my opinion, wholly illusory that the lease could be put to residential uses by the lessee, which was the basis for the 1999 valuation by the Valuer General. 5 In my opinion, the words 'for rental purposes' in the rental review clause mean that the valuer is to determine the value of the property for the purpose of the rental of the property under the use or uses permitted by the lease. In this respect I agree with Fitzgerald JA. I do not accept that this construction rewrites the provision or imports into the phrase 'for rental purposes' words which they do not properly contain. The construction which, like Fitzgerald JA, I believe is appropriate does not rewrite the lease but accords with what was most likely to have been the intention of the parties when they entered into the lease in 1987. 6 In my opinion, the respondent's submission fails to give real effect to the words in the phrase 'valuation of the demised premises for rental purposes'. Clearly the parties intended the review to fix the new rent of the demised premises for the ensuing 3 years. But it was to be the rental for the purpose for which the lease was or could be used, not for its highest and best use. It is hardly likely that the parties to the lease intended that the rental of the premises, to be used as a timber yard under the lease, should escalate in such an extreme fashion as to bear a rental of $1,225,000 pa for potential residential development which the lessee had no realistic possibility of ever achieving. 7 I agree with the orders proposed by Fitzgerald JA. 8 GILES JA: By a lease dated 21 January 1987 The Maritime Services Board of New South Wales ("the Board") leased to Montague L Meyer (NSW) Pty Ltd ("MLM") land at Homebush Bay in Sydney for a term of forty years commencing on 1 March 1984. The appellant BBC Hardware Ltd is the successor in title of MLM, and the respondent Payce Properties Pty Ltd is the successor in title of the Board. They are in dispute over the rent payable for the periods 1 March 1996 to 28 February 1999 and 1 March 1999 to 28 February 2002 pursuant to the rent review provisions in the lease. The lease 9 At the time of the lease the land was used by MLM as a timber yard. Timber imported from overseas or interstate was brought to the land. It was stored on the land, some was processed into timber products, and all was repackaged and distributed throughout New South Wales. Storage sheds, office space and related buildings stood on the land. By cl 20 of the lease the land was to be used by the lessee - " … solely for the purposes of the business of the Lessee as now carried on and/or for such other business purposes as the Lessee may hereafter from time to time intend and the Board may in writing approve but such approval may not be unreasonably withheld." 10 There were provisions of the lease to do with payment of rates and taxes, insurance and repairs and maintenance. The lessee could not alter or erect improvements without the lessor's consent, it was obliged to dredge the bed of the waters abutting the land if the lessor so required, and it had to remove all its improvements at the expiry of the lease if the lessor so required. The lease could not be assigned by the lessee without the lessor's consent. The detail of these provisions, to which I have referred with the inaccuracy which comes from brevity, does not matter. 11 Clause 30 of the lease provided - "30. That the Lessee shall pay in the manner hereinbefore provided the following rents namely - (i) during the first three years of the term an annual rental of Ninety six thousand dollars ($96,000.00); (ii) during the next following three year period of the term an annual rental equal to the rental provided for in paragraph (i) of this clause increased by an amount equal to ten per centum or such less factor as the Board may determine of the amount of increase (if any) in the valuation of the demised premises for rental purposes as determined by the Valuer General for the State of New South Wales at any time during the year immediately preceding the date of commencement of such period of three years; (iii) thereafter for each and every succeeding period of three years at an annual rental equal to the rental which applied during the year immediately preceding the respective dates of commencement of each such three year period increased by an amount equal to ten per centum or such less factor as the Board may determine of the amount (if any) by which the valuation of the demised premises for rental purposes as determined by the Valuer General at any time during such immediately preceding year exceeds the immediately preceding valuation for rental purposes; PROVIDED THAT the valuation of the demised premises for rental purposes at the commencement of this lease shall be taken and accepted as One million two hundred thousand dollars ($1,200,000.00)." 12 A variation of lease dated 31 May 1991 provided by cl 5(a) - "For the purposes of clause 30 of the Lease the parties agree that: (1) before 2 March 1996, the annual rent may not be varied except in accordance with clause 4 of this deed, (2) from 1 March 1996 to 28 February 1999, the annual rent then payable will be the sum of $550,000 plus an amount equal to 10% of the amount, if any, by which the valuation of the demised premises for rental purposes as determined by the Valuer General at any time during the year ending 28 February 1996 exceeds $5,250,000, and (3) from 1 March 1999, the annual rental then payable will be determined in accordance with clause 30(iii) of the Lease." The dispute 13 The Valuer General provided two valuations, one under cover of a letter dated 16 February 1999 expressed to be "the value on a vacant possession basis as at 28 February 1996" ("the first valuation") and the other under cover of a letter dated 24 February 1999 expressed to be "the value on a vacant possession basis at 23 February 1999" ("the second valuation"). If effective as valuations for the purposes of cl 30 of the lease and cl 5(a) of the variation of lease, they meant that the annual rent payable for the period 1 March 1996 to 28 February 1999 was $875,000.00 and the annual rental payable for the period 1 March 1999 to 28 February 2002 would be $1,225,000.00. 14 For present purposes it is sufficient that both valuations were on the basis of the highest and best use of the land, in the case of the first valuation with regard to its potential for industrial development and in the case of the second valuation with regard to its potential for residential development. 15 The appellant had paid an annual rent of $550,000.00 from 1 March 1996. The respondent brought proceedings claiming from it arrears of rent on the ground that the valuations were effective to establish the increased rents, being arrears of $975,000.00 for the period 1 March 1996 to 28 February 1999 and arrears of $675,000.00 for the first year of the following period. 16 The appellant defended the proceedings on the grounds - (a) that the first valuation was not a valuation in accordance with cl 5(a) of the variation of lease because - (i) it was not determined by the Valuer General during the year ending 28 February 1996; and (ii) it was not a valuation of the demised premises "for rental purposes" within the meaning of cl 5(a) of the variation of lease; and (b) that the second valuation was not a valuation in accordance with cl 30(iii) of the lease because it was not a valuation of the demised premises "for rental purposes" within the meaning of that clause. 17 The appellant also cross-claimed in the proceedings claiming a declaration that any valuation had to be made on the basis that the land was used for the purpose specified in cl 20 of the lease, that being the effect of the words "for rental purposes" for which it contended, and declarations that the valuations were not valuations in accordance with the relevant provisions of the lease and the variation of lease. The decision below 18 Einstein J found in favour of the respondent. He held that it was not necessary that the first valuation be determined during the year ending 28 February 1996, and that cl 5(a) of the variation of lease was satisfied by a valuation made thereafter but as at a time during the year ending 28 February 1996. He held in the alternative, following a line of authority commencing with United Scientific Holdings Limited v Burnley Borough Council (1987) AC 904, that the stipulation as to time in the rent review provision was not of the essence and it was not a condition precedent to the rent variation that the Valuer General's determination be made during the year ending 28 February 1996. He rejected the effect of the words "for rental purposes" for which the appellant contended, and held that those words referred to the reason or purpose of the valuation. Time of valuation 19 Where the valuation was to be made by a third party, it is unlikely that the parties to the lease intended that they should be exposed to compliance by the third party with a fixed time limit. Neither of them could force the Valuer General to make the valuation in a timely manner. The lease did not require that the parties or one of them act within a particular time to cause the Valuer General to value the land, or state any consequences if the valuation was not made in a timely manner. Further, it has long been common that a valuation is made as at an earlier time, including for a rent review provision. There is nothing extraordinary in the conclusion to which Einstein J came. Rather, it gives a sensible result if the words of the provisions so permit. 20 In my opinion the words "as determined by the Valuer General" identify the person who is to value the land, and the following words "at any time during such immediately preceding year" and "at any time during the year ending 28 February 1996" identify the time, or more correctly the range of times, as at which that person is to value the land. This is well within the natural meaning of the combinations of words, and adequately serves the purpose of the provisions . It also gives "at" in the words secondly set out the same operation as "at" in the proviso to cl 30 of the lease, that is, to identify the time at which the valuation speaks. In my opinion, the decision of Einstein J on this matter was correct. 21 It is not necessary to enter upon United Scientific Holdings Limited v Burnley Borough Council or the cases considering or applying it. Valuation for rental purposes 22 According to the appellant's argument, the words "for rental purposes" meant "for the purpose of fixing the rent under the lease having regard to the use of the land permitted by cl 20". As I understand the argument, from the reference to rental it was necessary to assume that the land was leased, and further to assume that the hypothetical lease contained the restriction on use found in cl 20 of the lease. If the argument be otherwise sound, I can not see why the assumptions would go only to the restriction on use found in cl 20 of the lease. It would have to be assumed that the hypothetical lease contained all the provisions of the lease except as to the amount of the rent. 23 Apart from the practical difficulties this would present in making the valuation, I do not think the argument should be accepted. It re-writes the rent review provisions, and finds in the words "for rental purposes" more than they properly contain. Confining attention to cl 20 of the lease, while it provided that the land should be used by the lessee only for certain purposes (albeit open ended purposes in that any business purposes were potentially available), the words "for rental purposes" did not require the Valuer General to assume for his valuation that the land was the subject of a lease which included such a provision. At most, the reference to rental could require the Valuer General to assume for his valuation that the land would be turned to account by its owner by leasing it to a lessee, with only such limitation on the duration, nature and terms of the lease, and in particular the use to which the lessee could put the land, as the Valuer General in his valuation judgment thought appropriate. This is unlikely to have been intended, and the appellant did not submit that it should be found. In Plinth Property Investments Pty Ltd v Mott Hay & Anderson (1979) 38 P & C R 361, on which the appellant relied, the relevant clause specifically required the valuer to have regard, amongst other things, to the provisions of the lease, and it was quite a different case. 24 Reference to a valuation for rental purposes immediately invites the question, from what valuations with other purposes is the valuation for rental purposes distinguished? Land may be valued for other purposes, for example, for sale purposes in order to arrive at a price to be received or paid, or for mortgage purposes in order to arrive at an amount to be lent or borrowed. It is common in instructions for a valuation or in a valuation to state the reason why the valuation is to be or is made, because the valuation process properly involves attention to the purpose to be served by the valuation: see for example Corisand Investments Ltd v Druce & Co (1980) 26 The Valuer 58 at 62-3; Rothwell, "The Credibility Gap", in Whipple (ed), Real Estate Valuation Reports and Appraisals, 18; Ellis, "Demonstration Report: Security Assessment Muddy Waters Estate" in ibid, 103; Whipple, Property Valuation and Analysis, 51-5. In the present case the Valuer General was a statutory officer with the functions conferred or imposed by or under the Valuation of Land Act 1916 or other legislation, and valued land for a variety of purposes found in the legislation. It is therefore understandable that the lease should have stated the purpose of the valuation, making express what may well have been implicit and in particular distinguishing the valuation from a valuation made by the Valuer General for a purpose found in the legislation. 25 Contrary to the appellant's submission, the presence of the words "for rental purposes" is explicable, and the words play a part, without giving to them the effect for which the appellant contended. They meant that the valuation was in order to arrive at the rent to be received and paid. The Valuer General had to value "the demised premises", that is, the land at Homebush Bay - in lawyers' language, the fee simple. The rent was effectively an agreed percentage of the value of the land, and so the valuation was used to arrive at the rent to be received and paid. 26 The appellant submitted that the land was part of a specialised industrial area developed by the Board for industrial use, including use such as that to which MLB put the land. Assuming regard can be had to this, I do not think it assists the appellant. The lease was a long-term lease, and so had rent review provisions, the normal commercial purpose of which is to keep the rent in line with current property values. Changes in the locality, in the planning instruments relevant to the land, and in the economically advantageous use of the land could be expected. No doubt the lessee would want to be protected from paying a greatly increased rent while still restricted in the use of the land. But the lessor would not want to be left with an inadequate return from land of greatly increased value. Their bargain must be found in the words they used. 27 The appellant also submitted that it gained assistance from correspondence between the Board and MLM at the time of the lease. I do not agree. 28 MLM's current lease of the land was about to expire. On 28 February 1983 the Board wrote to MLM saying that it was prepared to grant a fresh lease and would "advise details of rental etc as soon as possible". 29 On 30 March 1984 the Board wrote to MLM regretting that it had not "detailed" the terms and conditions of the fresh lease and saying that it would - " … generally contain terms and conditions similar to those embodied in the current lease agreement including - (i) initial rental would be calculated on 8% of a site valuation for rental purposes to be obtained from the Valuer General and provision would be made for re-appraisal of rental at three yearly intervals and increased by not more than 10% of any increase in the site valuation to be obtained from the Valuer General at the appropriate time; (ii) the premises to be used for the business purposes of Montague L Meyer (NSW) Pty Ltd. The Board has requested the Valuer General's Department to provide a valuation for rental purposes. When this valuation is received the Company will be notified of the rental to apply for the initial term of the lease." 30 On 5 June 1984 the Board wrote to MLM - "I am instructed to advise that the Valuer General has now furnished for assessment of rental, a site valuation of $1,500,000 for the proposed lease area. Accordingly, rental for the first three years of the lease has been assessed at $120,000 per annum plus rates. Enclosed for your information is a copy of letter dated 1st May, 1984 from the Valuer General's Department. Further to my letter of 30th March, 1984 please advise whether the above offer is acceptable." 31 On 22 January 1986 the Board wrote to MLM - "I refer to previous correspondence and advise that the Board has recently been advised by the Valuer General's Department that the valuation for leasing purposes of the subject premises has been revised to $1,200,000 which it will be noted is the valuation arrived at by your client company's valuer Stanley Thompson Valuers Pty Ltd. Accordingly, rental to apply for the first three years of the proposed 40 year lease has been reassessed by the Board at $96,000 per annum plus rates." 32 The appellant said that the parties had arrived at the initial rent upon a valuation for rental purposes. Those words were used, although there was also reference to a "site valuation for rental purposes" and a "site valuation" furnished "for assessment of rental". But, again assuming regard can be had to the correspondence, it does not indicate that "for rental purposes" was given the meaning for which the appellant contended, and neither the valuation or revised valuation by the Valuer General nor the valuation by Stanley Thompson Valuers Pty Ltd was in evidence. If anything can be found in the correspondence, it seems that the Valuer General was asked to prepare a valuation for rental purposes before the terms and conditions of the lease had been established, and that and the reference to a site valuation furnished for assessment of rental would tell against the appellant's contention. 33 In my opinion the decision of Einstein J on this matter also was correct. The result 34 The appeal should be dismissed with costs. 35 FITZGERALD JA: The circumstances giving rise to this appeal are set out in the reasons for judgment of Giles JA. 36 The rent increases for which the parties' lease provides are a percentage of the increase, over the material period, ".. in the valuation of the demised premises for rental purposes as determined by the Valuer General…". The parties disagree on what is a "valuation … for rental purposes" within the meaning of their lease. 37 It was submitted by the respondent, and I think at least implicitly accepted by the appellant, that the purpose of a valuation can affect the value attributed to a property. The designated valuer, the Valuer General, was directed by the lease not to perform a statutory valuation of the subject property in accordance with the Valuation of Land Act 1916 but to value the property "for rental purposes". 38 That conclusion does not resolve the parties' dispute. It leaves for determination what is a "valuation … for rental purposes" of the subject property within the meaning of the lease. 39 The respondent erroneously submitted that the meaning for which it contends is the plain literal meaning of the lease and that the meaning for which the appellant contends requires the implication of additional words into the language adopted by the parties and involves circularity of reasoning. The critical phrase "valuation … for rental purposes" is capable of more than one meaning. The Court's task is to determine which of those meanings it bears in the context of the lease. That exercise in construction does not necessitate the implication of additional words. 40 A "valuation …for rental purposes" i.e., for the purpose of rental, of the subject property requires the determination of its value on the basis that it is to be (or has been) leased. According to the respondent's argument, the parties' lease is to be ignored in such a valuation, which simply involves a determination of the value of the property on the basis of its highest and best use unaffected ("unencumbered" in the language employed by the respondent) by the existence of the parties' lease. The value of the property must be determined according to its highest and best use even though the property cannot be put to its highest and best use because of the lease and even if the highest and best use of the property is not a use for which the property could, or at least would be likely to, be leased. Indeed, both disputed valuations determine the value of the property on the basis of its use for development, the 1999 valuation on the basis of residential development. The feasibility of a lease for residential development of land by a lessee is not obvious, particularly when, as in this case, the appellant's interest as lessee cannot be assigned or subleased without the consent of the respondent - property owner. 41 The appellant accepted that the "valuation … for rental purposes" for which the lease provides is not required to take into account all the terms of the lease, but argued that a "valuation … for rental purposes" within the meaning of the lease requires a valuation of the property on the basis of the use (or uses) permitted by the lease, not the highest and best use which might be made of the property if the lease did not exist. Alternatively, it was submitted that, if a "valuation … for rental purposes" within the meaning of the lease involves a determination of the value of the property on the basis of its highest and best use, that value must be reduced to take account of the circumstance that the property cannot be put to its highest and best use until after the termination of the lease. 42 The lease documents a commercial arrangement which the parties intended to govern their relationship for a term of 40 years. The phrase "valuation … for rental purposes" is contained in clauses dealing with periodic determination of rental by reference to redetermination of the value of the property in a lease which restricts the use of the property to a permitted use specified for the duration of the lease. Any change in use of the property requires the respondent's agreement. In that context, the phrase "valuation .. for rental purposes" seems to me to refer to the determination of the value of the property for the purpose of the rental of the property for its permitted use, or, if that use is changed consensually, the new permitted use adopted. 43 Accordingly, I am of opinion that the disputed valuations were not made in accordance with the lease. 44 The remaining question is whether it is now too late for a valuation to be made in accordance with the lease in respect of either of the material periods. For the reasons given by Giles JA, I agree with his Honour that it is not too late. 45 I would allow the appeal with costs, set aside the orders below, make the declarations requested in the Notice of Appeal The respondent did not contest the form of the declarations sought by the appellant if the appeal succeeds. and order the respondent to pay the appellant's costs of the proceeding in the Equity Division. ____________ DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.